Nvidia (NVDA 1.40%) stock has pulled back from its peak in June as the stock market seems to be debating the future of the AI boom.
Some investors think the rally overheated as the new technology has yet to produce a “killer app” or make any major disruptions in the economy. There was evidence of this when Alphabet and Microsoft stocks both pulled back following their recent earnings reports as investors questioned the level of spending on AI infrastructure and wondered if those tech giants would get a return on those investments.
However, there are plenty of AI bulls remaining, and among them is former Google CEO Eric Schmidt. In a recent conversation at Stanford University, Schmidt commented on the evolution of artificial intelligence, saying that companies were planning to spend tens of billions of dollars or even hundreds of billions of dollars on AI infrastructure. Microsoft and OpenAI, for example, are planning for a massive data center and supercomputer project, known as Stargate AI, that could cost as much as $100 billion.
Schmidt went on to say, “(OpenAI CEO) Sam Altman is a close friend. He believes it’s going to take about $300 billion, maybe more…” The “it” here refers to meeting their needs for AI infrastructure.
Continuing, he said, “If $300 billion is all going to Nvidia, you know what to do in the stock market,” though he added, “That’s not a stock market recommendation.”
Still, it’s a reminder to investors not to take their eye off the long-term goal when it comes to AI as the buildout is only just beginning.
Keep in mind that Schmidt’s quote just refers to open OpenAI’s infrastructure needs, so if that’s correct, the demand in the industry is much greater than that.
In fact, Sam Altman is trying to raise as much as $7 trillion to expand the world’s semiconductor industry in order to achieve artificial general intelligence (AGI), or AI that is as capable or more capable than a human.
AGI is OpenAI’s stated goal, and other tech visionaries like Tesla’s Elon Musk are working toward it as well. Investors should expect them to continue to build the needed computing power until AGI is achieved. Nvidia CEO Jensen Huang has predicted that artificial general intelligence is five years away, so the market is likely to see AI investment increase during that time.
If you look past the market volatility and doubts among investors, nothing has changed about the tech industry’s expectations for AI. The race among the “Magnificent Seven” and other companies will determine the winners in the industry for the next generation and building the necessary infrastructure is crucial.
Nvidia remains the far-and-away leader in data center GPUs and other components needed to run AI models like ChatGPT, and it’s likely to continue to dominate that market even as competition from AMD and Intel comes online.
Nvidia had an estimated 98% share of the data center GPU market in 2023, and the company’s data center revenue jumped 427% in the first quarter to $22.6 billion. That growth rate will slow as it laps the initial generative AI investment boom that followed the launch of ChatGPT, but Nvidia will almost certainly grow at a high rate as the race to AGI picks up.
Investors can debate the proper valuation for Nvidia stocks, but the strength of its business and its future potential are hard to dispute. The demand ramp for its products still has a long way to go, according to the needs of AGI and statements from the likes of Schmidt and Altman.
In fact, Schmidt’s biggest concern about the surge in AI infrastructure was finding enough electricity to power these massive data centers. While that could be a challenge down the road, taking his advice and buying Nvidia’s stock now makes a lot of sense.
